USPS OIG Report: Operational Window Change Savings

Objective

The objective of our audit was to determine if the Postal Service achieved its projected savings for the Operational Window Change (OWC).

On January 5, 2015, the Postal Service revised its First-Class Mail (FCM) service standards, eliminating single-piece overnight FCM service and shifting some mail from a 2-day to a 3-day service standard. These revisions enabled the Postal Service to expand its mail processing operational window to process mail on fewer machines, thus using less facility square footage. This change is known as the OWC. The OWC also required changes in mail transportation. The Postal Service projected the OWC would save over $805 million annually.

In our Mail Processing and Transportation Operational Changes report (NO-AR-16-009, dated September 2, 2016) we determined the Postal Service achieved only $81.1 million of its projected OWC savings and transportation costs exceeded the planned budget by over $200 million in 2015, the first year after the OWC revisions occurred. In addition, mail processing productivity decreased by 4.5 percent that same year. We recommended management re-evaluate and update the projected operational and transportation financial impacts associated with the OWC and develop and implement a strategy to improve mail processing productivity. Management partially agreed with the recommendations, but did not state if they plan to re-evaluate the impact of the OWC on Postal Service productivity. Both recommendations are open and while they provided data related to budget reductions, they did not provide the OIG any additional information. We are reviewing the OWC savings again because in our response to management comments in the prior audit, we said we planned to conduct additional audit work in this area.

What the OIG Found

The Postal Service did not achieve its projected $1.61 billion OWC savings for fiscal years (FY) 2016 and 2017. Postal Service management identified savings of $275.25 million for FY 2016 and $17.22 million for FY 2017, or about 18 percent of the projected savings for both years. We could only verify about $73.43 million of the FY 2016 savings and $17.22 million of the FY 2017 savings – about $90.65 million, or 5.6 percent of the projected savings for both years. Outside of the projected savings presented to the Postal Regulatory Commission, the Postal Service identified an additional $430.2 million in cost avoidance related to the OWC, $232.8 million of which we could verify. Therefore, in total we verified $323.48 million in savings and cost avoidance related to the OWC. The Postal Service identified the following categories for OWC annual savings:

Mail processing productivity gains were estimated to be almost $679 million annually by balancing the mail processing workload across the day and matching workhours to workload. Management said they achieved savings of over $200 million in FY 2016, but did not provide savings for FY 2017 because accurate data was not available due to changes in mail volumes. Our review determined that while costs did decrease in some mail processing operations, overall mail processing costs have increased by $153 million since the OWC. Thus, we could not confirm the savings identified by management. Further, we found that mail processing productivity is now 14 percent lower since the start of the OWC. Postal Service management said it’s a lengthy process to adjust workhours for operations with decreasing letter and flats mail volume and increasing package volume which contributed to decreased productivity. They also indicated that management of those workhours could be improved at the facility level. Based on our analysis, we concluded that it is unlikely the Postal Service achieved productivity savings in FYs 2016 and 2017 related to the OWC.

Premium pay reductions were projected to be about $65.7 million annually by moving employees from the night shift to the day shift. Employees working at night are paid a premium, known as night differential. Management said savings were about $15.5 million in FY 2016, but they did not provide savings for FY 2017 because accurate data was not available due to changes in mail volumes. We verified the FY 2016 premium pay savings were achieved.

However, we found that mail processing overtime costs have increased by $68.4 million, or 9 percent, since the OWC. We are currently conducting audit work in this area.

Additional delivery point sequencing (DPS) was projected to be about $32.8 million in annual savings from more mail being in DPS for delivery. Management said savings were about $42.2 million in FY 2016, but did not provide any savings for FY 2017 because accurate data was not available due to changes in mail volumes. Management said they used the same methodology to calculate savings as the original projections, by taking one month of data and projecting it over the year to determine how much more volume was added to DPS in FY 2016. We found these savings were achieved.

Reduction of secondary sorting was projected to be about $16.7 million in annual savings by reducing outgoing secondary mail sorting, or doing less mail sorting at fewer facilities. Management said savings were about $4.9 million in FY 2016 and about $6.2 million in FY 2017. We found these savings were achieved.

Use of more efficient processing machines was projected to save about $11.5 million annually by transferring mail volume to more efficient mail processing machines, such as the Delivery Bar Code Sorter and Automated Flats Sorting Machine 100 machines. Management said savings were about $10.74 million in FY 2016 and about $11.02 million in FY 2017. We found these savings were achieved.

Although management provided savings amounts for FYs 2016 and 2017, they qualified the saving amounts as being only estimates. They said they could not determine the actual amount of OWC savings achieved for FYs 2016 and 2017 because significant declines in letter and flats mail volume and increases in package volume “skewed” the data. Management also said this was the reason they did not provide FY 2017 savings amounts for all OWC categories. Mail volume decreased by almost 5 billion pieces from FYs 2016 to 2017, making it more difficult for the Postal Service to achieve the OWC savings. However, the Postal Service did not re-evaluate its estimated annual savings. Management said they remain optimistic they will achieve the full savings.

However, we concluded that it is unlikely the Postal Service will ever achieve the projected annual $805.5 million OWC savings. The Postal Service did not develop an annual tracking methodology for each OWC savings category and did not develop a sensitivity analysis to account for changes in mail volume, changing labor cost, and transportation costs when they projected the OWC annual savings.

Even though the Postal Service has not achieved its projected OWC savings, reverting to the previous operational window would likely cause further service disruption and additional cost. The OWC and the service standard revisions enabled the Postal Service to consolidate 17 mail processing facilities and partially consolidate another 21 facilities. Reestablishing the previous operating window could be cost prohibitive for the Postal Service.

In addition to the OWC savings projections, the Postal Service projected annual transportation savings of over $268 million from network changes. However, transportation costs have increased by more than $1 billion, or 15.4 percent, since the OWC was implemented. Postal Service management said that transportation costs increased because the volume of packages require more space than other types of mail as well as higher driver contract rates.

In the first year of the OWC, FCM single piece and commercial service scores decreased by over 11 and 4 percentage points. In addition, delayed mail increased to about 2.5 billion pieces in FY 2015. FCM service scores and delayed mail improved in FYs 2016 and 2017. However, in the first two quarters of FY 2018, FCM service scores decreased to where they were the year after the OWC and there were about 2.5 billion pieces of delayed mail.

Outside of the projected savings presented to the Postal Regulatory Commission, the Postal Service identified an additional $430.2 million in cost avoidance related to the OWC, $232.8 million of which we could verify. Specifically, management said the OWC created additional facility space for new package processing machines by reducing the number of letter processing machines. The Postal Service also completed an upgrade to letter processing machines after implementing the OWC. Management said that this reduction of letter machines allowed the Postal Service to avoid costs it would have incurred to upgrade the letter machines. Based on our analysis of the data, we calculated a cost avoidance of $232.8 million.

What the OIG Recommended

We recommended that management develop and implement, at a minimum, annual tracking methodologies for any significant projected operational costs or savings and use a sensitivity analysis to account for such impacts as changes in mail volume and labor and transportation costs. The issues identified in this report were the same issues identified in the prior report and we believe the open recommendations from the prior report would address these issues; therefore, we are not making additional OWC recommendations.